PPG INDUSTRIES INC quarterly report, Q2 FY2019

PPG Industries, Inc. — 2019 Q2 Form 10-Q Summary

Business context and reporting period

PPG is a global coatings and specialty materials manufacturer with two reportable segments: Performance Coatings and Industrial Coatings. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.

Financial performance and liquidity

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Net sales	$4,024 million	$4,131 million	$7,648 million	$7,912 million
Income before taxes	$363 million	$479 million	$782 million	$900 million
Income from continuing operations attributable to PPG	$270 million	$371 million	$582 million	$699 million
Net income attributable to PPG	$272 million	$371 million	$584 million	$705 million
Diluted EPS from continuing operations	$1.13	$1.51	$2.44	$2.81
Adjusted diluted EPS from continuing operations	$1.85	$1.90	$3.23	$3.31

Q2 net sales declined 2.6%; six-month sales declined 3.3%. Reported diluted EPS from continuing operations declined 25.2% in Q2 and 13.2% year to date.
Q2 cost of sales was 56.9% of sales versus 57.6% in the prior year; SG&A was 23.2% versus 22.9%. The reported continuing-operations net margin attributable to PPG was approximately 6.7% in Q2 versus 9.0% in Q2 2018.
Six-month cash from operating activities was $482 million, including $486 million from continuing operations, versus $131 million and $131 million, respectively, in 2018.
Six-month investing cash outflows were $457 million, including $133 million of capital expenditures and $361 million for acquisitions. Financing cash flow was $32 million, after $227 million of dividends and $175 million of share repurchases.
Cash and cash equivalents were $963 million at June 30, 2019, compared with $902 million at December 31, 2018. Cash and short-term investments totaled approximately $1.0 billion.
Short-term and current debt was $654 million and long-term debt was $4.845 billion. Including finance leases, debt represented 52% of total debt and equity. Commercial paper borrowings increased by $470 million during the first six months and were classified as long-term based on refinancing expectations.
Total assets were $17.955 billion and total liabilities were $12.768 billion at June 30, 2019. Operating working capital increased to $2.780 billion, or 17.3% of annualized sales, from 15.3% at December 31, 2018.
The six-month effective tax rate was 24.0%, compared with 21.2% in 2018. Management expected the full-year 2019 adjusted effective tax rate to be 23%–25%.

Material changes versus the prior comparable period

Sales performance was affected by lower volumes and unfavorable currency translation, partly offset by higher selling prices and acquisition-related sales. In Q2, the impacts were approximately negative 4% from volume and negative 3% from currency, offset by positive 2% pricing and positive 2% acquisition-related sales.
Foreign currency translation reduced Q2 sales by approximately $130 million and six-month sales by approximately $290 million.
Performance Coatings Q2 sales decreased 2.7% to $2.430 billion, while segment income decreased 0.7% to $425 million. Six-month segment income increased 2.0% to $722 million.
Industrial Coatings Q2 sales decreased 2.4% to $1.594 billion, while segment income increased 5.4% to $235 million. Six-month sales decreased 4.4% and segment income decreased 1.9%.
Reported results included significantly higher restructuring charges: $176 million in Q2 2019 versus $83 million in Q2 2018. The June 2019 restructuring program carried a pretax charge of $184 million and targets manufacturing optimization, product-line exits, portfolio pruning and cost-structure changes.
Other unusual Q2 charges included $30 million of net environmental remediation charges, $10 million of acquisition-related costs, $6 million of accelerated depreciation and restructuring costs, and $3 million related to accounting investigations. Adjusted Q2 EPS was $1.85 versus $1.90 in 2018.
PPG acquired Whitford and Hemmelrath in 2019. Management stated that the pro forma impact of each acquisition was not significant, although the businesses contributed acquisition-related sales and increased goodwill.
PPG adopted the new lease accounting standard in 2019, recording $731 million of operating lease right-of-use assets and $739 million of operating lease liabilities at June 30, 2019.

Guidance, outlook, commentary and risks

Management expected industry demand to remain similar to Q2, with seasonally modestly lower sales in Performance Coatings. Performance Coatings acquisition-related sales were expected to add approximately $15 million in Q3, with an unfavorable currency impact of approximately $15 million–$25 million.
Industrial demand was expected to remain subdued through Q3, with sales-volume trends similar to Q2 and modest improvement expected in Q4. Whitford and Hemmelrath were expected to add approximately $80 million of Q3 sales, while currency was expected to reduce sales by approximately $15 million–$25 million.
Expected 2019 restructuring savings were $75 million–$85 million. The 2019 program was expected to generate approximately $125 million of annualized savings upon completion, with most actions expected to be completed by 2022. Total capital spending was expected to be up to 3.0% of full-year sales.
PPG expected mandatory non-U.S. pension contributions of $10 million–$20 million during the remaining six months of 2019. Projected environmental remediation cash outlays were $45 million–$65 million for the remainder of 2019 and $20 million–$50 million annually during 2020–2023.
Key risks include global economic and industrial weakness, raw-material cost and availability, the ability to implement price increases and recover margins, customer inventory changes, foreign-exchange volatility, acquisition integration, restructuring execution, environmental regulation, litigation, tax changes and ongoing government investigations related to accounting matters.
Environmental reserves totaled $293 million at June 30, 2019, including $148 million for the New Jersey Chrome sites. Management identified additional reasonably possible but unreserved environmental losses of approximately $100 million–$200 million.
PPG had approximately 490 open and active asbestos-related claims and reserves of approximately $180 million for asbestos liabilities not channeled to the Pittsburgh Corning trust. A proposed $25 million securities class-action settlement was awaiting court approval, with insurance coverage recorded for the full amount.
Management stated that available cash, operating cash flow and capital-market access should be sufficient to fund operations, capital spending, acquisitions, dividends, debt service, repurchases, pensions and contractual obligations.

Facts investors should verify

Whether volume weakness and subdued global industrial and automotive demand persist, particularly in China and other Asia-Pacific markets.
Execution, timing and realized savings from the 2019, 2018 and 2016 restructuring programs, including the approximately $125 million annualized target for the 2019 program.
Progress on price increases and recovery of margins amid raw-material, wage and other cost inflation.
Integration and contribution from Whitford and Hemmelrath, including the expected acquisition-related sales growth.
Working-capital trends, especially the increase in operating working capital to 17.3% of annualized sales and higher receivables and inventories.
Future cash requirements and changes in environmental, asbestos and litigation liabilities, including the New Jersey Chrome remediation estimates and proposed securities settlement.
Debt levels, commercial paper refinancing capacity, interest-rate exposure and foreign-currency sensitivity.